Predicting a Crash Years in Advance Is Unimpressive

I disagree with Hamilton Nolan's call for Social Security cuts at Gawker, but arguing about Social Security is boring. The interesting issue raised by his post is that one of the reasons Nolan cites for why we should be impressed by rich hedge fund guy Stanley Druckenmiller wanting to cut Social Security benefits is that Druckenmiller "predicted the last financial crash (the collapse of the housing bubble) years before it happened."

In this era of obsession with bubbles, I think it's important to recognize how fundamentally unimpressive it is to call a financial crash years in advance. If I predict to you today that the stock market is going to crash soon and people are going to lose a lot of money, and then people keep making money for the next 40 months and then the stock market crashes, that would hardly make me a genius financial forecaster. It just shows that the stock market has big crashes every now and again. Sometimes those crashes are driven by clear deterioration in the fundamentals (2008), sometimes they're driven by past overexuberance (2000), and sometimes they seem to be driven by nothing at all (1987). That's life.

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This is also, incidentally, my frustration with the China Bears. When I visited China in 2009, it was already the conventional wisdom among well-informed China watchers that China was a bubble economy driven by unsustainable levels of investment and primed for a crash any day now. Now in 2013 it's the conventional wisdom among well-informed China watchers that China is a bubble economy driven by unsustainable levels of investment and primed for a crash any day now. And one of these days China really will crash! And one of these days the bull run we've seen in the S&P 500 will crash! All prices eventually fall! All economies (except Australia, apparently) have recessions sooner or later! Bad things happen! I know even better that at some point these folks screaming about imminent inflation will be vindicated.

But to be really impressive, what you need to do is say something concrete about timing. Is this happening in the next six months? Next year?